Looking for False Positives

As industry and markets become more consolidated, the more contractionary (deflationary) the economy tends to be.

As firms get bigger, the economy gets smaller, and each deflationary phase of the business cycle becomes the opportunity for firms to "grow" larger. According to Wall Street, this consolidation of value is economic growth. Thus, preventing consolidation prevents economic growth.

Capitalism's interpretation of consolidation as a growth indicator is a false positive--it indicates contraction, not expansion. It is a false efficiency intentionally structured to defeat free-market mechanics, not support it. So we see, then, a disconnect between what capitalism says it is and what it really is.

Wall Street is famous for fraud, and it is no less the case--in fact, it is absolutely critical--when it comes to valuation of the risk proportion.

We can only come to one conclusion based on the evidence: capitalism is not synonymous with free-market economics, and if we rely on a pluralistic model for predictive utility, we will fail politically and economically.

Looking at, for example, the anti-trust action against AT&T--with interest rates at near zero, there is ample capital available to build out a 4-G network without borrowing the money to merge existing firms. If capital is used to add supply by increasing the number of firms, the incentive to innovate increases along with the incentive to add employment (and reduce the deficit) without the taxpayer paying the employer to have a job which, by the way, is a false positive.

The way it is now, the incentive is perverse. The more firms consolidate, the more money is made available to reduce the deflationary risk. Instead of adding supply and producing growth, the incentive is to merge and acquire, achieving an economy of scale to survive the deflationary risk being accumulatively added. More money is then added to mitigate the risk, which provides the incentive to accumulate even more risk at a higher frequency.

Instead of adding supply, we are accumulating risk in the guise of promoting economic growth. When, for example, we trade tax incentives or provide subsidies for jobs, and firms then merge and unemployment rises, not only is there more incentive to pay the employer to have jobs, but the revenue to support it is regressively insufficient. The employment that subsequently occurs does not increase disposable income, but is used to pay the debt incurred to pay the employer to have a job.

While subsidies and tax incentives are supposed to indicate growth, they are really deflationary. The President, for example, proposes paying employers from the treasury to provide jobs, and John Huntsman proposes to eliminate capital gains taxes. Each has a clearly defined, near-term benefit, but also a late-order, deflationary effect. Both programs are false positive.

Wall Street is supposed to manage the risk to provide the greatest good for the greatest number of people, but "The People" suspect this is a false positive. This has political risk that Wall Street manages by shifting to other parties--political parties and administrative adjuncts like the Federal Reserve.

When the utility of Wall Street comes into question, government is there to absorb the risk. When the risk accumulates out of proportion (when it goes gamma), the cure is to reduce government authority, which is a false positive because when government is reduced the gamma-risk proportion remains. The remainder (the consolidated risk proportion) then becomes a plaything that toys with our sensibilities and drives us to distraction.

"Playing the Fed," for example, is Wall Street's current, favorite pass time. Again, the incentive is perverse, and the reason for the perversion is because the capital is too consolidated. This means capital, industry and markets need to be less consolidated, not more consolidated as capitalists suggest, if we are to cure the problem.

The incentive perversely feeds back on itself--the more deflationary Wall Street's investment program, the more accommodative the Fed becomes.

As the Fed tries to ease the deflationary trend with easy money, Wall Street uses the added capital to support the deflationary trend. It is not the Fed causing the perverse incentive, it is the consolidation of the risk. Ending Fed accommodation will result in the deflation it is avoiding, so the prospect of ending accommodative easing is falsely positive.

Of course, Wall Street renders the Fed counter-party to the risk. It is held responsible for mismanaging risk Wall Street contends is accumulated by government malfeasance in a crisis proportion.

Meanwhile, the Fed has been buying the time to deconsolidate the risk for years. The needed correction, however, has been mired in the gamma-risk dimension, and remember when the risk goes gamma it cannot be avoided--the probability is perfect.

Wall Street's latest game is culpable yet there is no prosecution of the risk detriment. All we have is indictment of government and our prudential regulators for causing what ails us, which falsely infers eliminating government and regulatory authority will cure the problem. It is a false positive, and more important, it is an accumulation of fundamental attribution error that signals our economy only gets worse before it gets better.

In order to clearly see indications of recovery it is critical to identify false positives. It is also critical to not operationalize false positives with recovery because the cycle occurs at an increasingly higher frequency, which means a recovery will quickly compress to consolidate gains.

The only reason it is so volatile is because the risk is too consolidated, and while capitalists define this as "the efficiency of markets," it is neither efficient or a free market.

In order to have the efficiency of a free market it is necessary to deconsolidate capital and industry--just exactly what we are not doing by deferring to false positives.